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September 25, 1999

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Business Commentary/ R C Murthy

World Bank follows in India's footsteps

The world is round. What the World Bank is doing now, India proposed and implemented nearly three decades ago, under the nomenclature of Integrated Development Projects, rural or otherwise. At that time, the World Bank pundits had questioned India's rationale for such projects and remarked that resources available and committed were not substantial enough to take up such resource-guzzling projects.

Soon after nationalisation of 14 major banks in 1969, the State Bank of India had concluded that the best way to work for rural development was village adoption scheme, another variant of IRDP. After a couple of decades, banks lost steam, the ethos of banks changed under the pressure of the World Bank. How can commercial banks, short and medium-term lenders as they have been, commit funds long-term?

Now the World Bank has realised that by commiting cash for an aspect of development, say irrigation, it is not achieving all the desired results. To utilise properly the irrigation facilities created, the infrastructure has to be in place and in the end marketing facilities for the products produced. That is why the Indian government and banks had hit upon the idea of integrated development.

The World Bank's variant of India's integrated development projects is called Comprehensive Development Framework. It is a holistic approach to development. As the World Bank sees it, the objective is a better balance in policy-making by highlighting the interdependence of all elements -- social, structural, human, governance, environmental, economic and financial.

The World Bank has come to the conclusion that development is about much more than the Balance of Payments, or reserves or trade figures or GDP growth. Development is about transforming societies.

Experience shows that unless we look at both sides of the balance sheet of a country -- macroeconomic and financial aspects on the one side and structural and human considerations on the other -- we run a grave risk of misjudging a country's performance as well as adequately supporting its future development.

CDF pilot projects are on in a dozen countries, spread over Africa, Latin America, Centrla Asia and the Pacific rim. If successful, these projects will have a demontration effect and help duplicate all over the world, leading to an explosion in demand for World Bank funding and expertise. This is in the right direction.

Similarly, there is a clash of ideas now with other internatiional financial institutions in several other areas. In its zeal to privatise, the International Finance Corporation, a World Bank affiliate, sold its prized Emerging Markets Data Base to Standard & Poor's for an undisclosed price. The IFC laboured hard over several years to build it. Because the IFC had done it, the data put out was respected by one and all, including governments in emerging markets.

The IFC thinks it had done a great job by this asset stripping, especially in favour of the private sector. The IFC has forgotten that when it takes equity along with the Asian Development Bank at companies in the emerging markets, quite often the governments favour them because they are international bodies. For instance, in the on-going debate in privatising general insurance in India, most parliamentarians are insisting that the foreign stake should be limited to 26 per cent.

But the government assured privately that this excludes the IFC and ADB stake. This is because these two have a long-term stake. They are not stags in the stock market parlance to make a quick buck and get out. They are interested in nurturing markets and are ready to wait for such good ideas and institutions to take root and thrive.

What are S&P's and others like? They do the job just according to their mandate. Take short or at the most medium-term view. Never bother about the consequences. The result is S&P's database will become another database. It will be sidelined, probably making the IFC to build something acceptable to one and all in emerging markets.

Another contentious issue at the current IMF-WB annual meetings in Washington is how the fiscal deficit is to be arrived at. Taking the deficits of public sector units and state goverments into account, the IMF says India's fiscal deficit is over ten per cent of GDP. Why public sector units?

Stretching the argument, even deficits of municipalities and other local bodies should also be accounted for. The deficits of all where the government has a stake directly or indirectly should be added up.

So, is the IMF wrong? Yes, it appears. Take for instance, Indian Bank which made a Rs 20 billion loss last year. Had there been a run, Indian Bank would have collapsed by now. Since it is government-owned, nothing of that sort happened. Depositors did not move their funds out of the bank. Some recapitalisation may be necessary. But the bank should be able to turn around this year.

While PSU deficits should be of concern, including them in the national deficit is stretching things rather far.

The correct thing to do is to include the deficit of PSU, which is slated to be privatised, immediately.

Fortunately, holding an opinion different from the World Bank has not been working to India's disadvantage. World Bank President James Wolfensohn is appreciative of India's intellectual capital and its initiatives.

Wolfensohn said the other day: "I think India has done pretty well. I think that India has pursued its own programmes. It's an economy that has grown reasonably well over the last decade. I think now on the issue of poverty it appears that on the trend of reduction of poverty, you are having more problems. And you have a serious potential problem with the AIDS epidemic, which is something of great concern to me."

But he is confident India will tackle them. "I think we should wait and see what happens as a result of the elections. But it's been my experience in the past that the Indian government establishes its own programmes. It consults with us, but I think has been quite successful and it wouldn't be my intention to suggest anything radical to the government. I would be very glad to sit down with them, but my guess is that, as before, the Indian government will decide for itself what it wants to do."

It's very encouraging for the Indian government. It should be innovative in trying to solve its complex problems. Good luck.

R C Murthy

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